THE EFFECT OF ARMINGTON STRUCTURE ON WELFARE EVALUATIONS IN GLOBAL CGE-MODELS

In this paper, the welfare results in trade liberalisation scenarios in global CGE models (like GTAP)
are analysed. The default modeling strategy in trade is the Armington assumption with bilateral trade
flows in industries. The negative terms of trade effects that often dominate the negative welfare
outcome in simulation experiments are decomposed to imports and exports price effects. The
numerical examples show that even in unilateral liberalisation with decreasing import tariffs, the
welfare effects are dominated by domestic price level changes that also drive the exports prices. The
numerical examples are built around simple GTAP tariff cut experiments with 3x3 country and
commodity aggregation. The inherent feature in this type of models is that they support arguments for
unilateral market access, like preferences, at the expense of multilateral trade liberalisation.